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Fire Sales and the Financial Accelerator, Woon Choi, David Cook

During periods of financial turmoil, increases in risk lead to higher default, foreclosure, and fire sales. This paper introduces a costly liquidation process for foreclosed collateral and endogenous recovery rates in a dynamic stochastic general equilibrium model of the financial accelerator. Consistent with empirical evidence, we find that recovery rates are pro-cyclical when collateral is costly to liquidate. Through links between recovery rates, risk premia, and default risk, the model generates an additional liquidity spiral, a feedback loop for the financial accelerator. We illustrate how collateral liquidation and monetary policy alter the impacts of a financial shock. We also show that a government subsidy on collateral liquidity and the endogenous accumulation of liquidity inventory help dampen the liquidity spiral by shoring up recovery rates
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; I. Introduction; 1. Recovery and Default Rates; II. The Model; A. Competitive Firms; B. Household; C. Capitalists; D. Retailers and Wholesalers; E. Central Bank and Shocks; F. Calibration; G. Discussion: Financial Shocks and Liquidity Spirals; 2. Financial Shocks and Liquidity Spirals; III. Model Results; A. Impacts of Financial Shocks and the Role of Collateral Liquidity; 3. Responses to a Financial Uncertainty Shock: Liquid Model versus Illiquid Model; B. Interest Rate Policy Response: Concerns about Recession Risk
Literary Form
non fiction
"June 2010"
Physical Description
1 online resource (44 p.)
Specific Material Designation
Form Of Item

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